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How to Get a Loan to Start a Business in 4 Steps

Editor's note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

How to Get a Loan to Start a Business

Getting a business up and running is easier when you have a little money to work with. But where can you go to get the funds you need to get your startup off the ground when small business loans can be hard to come by as a startup? Our recommendation: startup business loans.

Startup loans are loans from traditional lenders specifically for the purpose a starting a business.

Here are the four steps of how to get a loan to start a business:

  1. Review your startup costs. Be sure to understand what you’re using the loan for by reviewing the startup costs you face.
  2. Get your documents and registrations together. Take care of the basics like your business plan, your credit score, the necessary documentation, and the necessary registrations.
  3. Check your qualifications. Up your chances to qualify by improving your credit, building your assets, expanding your customer base, and updating your financial projections.
  4. Choose the right startup loan. Choose which type of startup loans you want to go for—equipment financing, business lines of credit, business credit cards, or credit line builders.

We’ll cover all the details of these four steps in our comprehensive guide to getting a loan to start a business:

Check Your Loan Options

1. Review the Startup Costs You Need to Cover

There are a variety of startup costs that you might encounter when you’re getting your small business up and running. Every business’s list of expenses will be different, but here are some common costs that come with starting a business:

  • Equipment purchases, like cash registers, machinery, and vehicles
  • Technology purchases, like computers, tablets, and printers
  • Initial inventory purchases
  • Permits and licenses, like city, country, and state licensing
  • Initial office supplies
  • Business furniture

After you pay these initial costs, you’ll have ongoing expenses—like taxes, rent or mortgage payments, employee payroll, etc.—that’ll you need to cover as you grow your startup.

How to get a loan to start a business? Your first step is knowing exactly what initial and ongoing costs you’ll need to cover, and how much you need to pay them. Once you have a solid understanding of how much funding you need, you’re ready to pursue your startup funding options.


2. Get Your Documents and Registrations Ready

As many small business owners can attest, getting a business loan to finance your new business venture can be challenging. Traditional lenders are hesitant to finance a young company with no business history and no proven revenue.

But, startup businesses have a better shot at securing financing when the founders do some preparation before starting their search for the perfect startup loan.

Wondering to yourself, “How do I get a loan to start a business?” The first step to getting a loan to start a business is making sure you have the necessary documentation together to start your startup loan search.

Prepare a Business Plan

Having a well-thought-out and thorough business plan is a great way to convince the lender that funding your startup is a smart investment. Your business plan should include your financial projections—future sales, profits, income, cash flow, and so on—and more qualitative goals for your business. How will you make a unique and important contribution to the market you’re in? Where, and how quickly, will your business grow?

You know that your startup has what it takes to be successful, but your lender doesn’t. You can take them out of the dark with a solid business plan. If you haven’t made one yet, here is a business plan template you can use to put one together.

Register Your Startup With Your Local Government Agency

Before they fund your startup, lenders will want to see that you’ve taken the steps to make your business official.

This means that you’ve officially filed your business with the necessary parties and have all the required licenses and permits needed to operate your business.

Prepare the Necessary Documentation

Your list of business loan requirements will vary from lender to lender, but there are documents that almost every lender will require: bank statements, income statements, personal tax returns, resume, financial projections, and so on.

Getting a small business loan can be a time consuming process, and organizing your information can be a hassle. But, you’ll save a lot of time on your startup loan application if you get these documents ready before you apply.


3. Check Your Qualifications for a Startup Loan

Once you have your paperwork in order, you must check to see if you can actually qualify for the loan you need. That means looking at the following criteria:

Improve Your Credit Rating

As a startup founder, you won’t necessarily have any established business credit history to prove your creditworthiness. So, lenders will look at your personal credit score as a way to gauge how reliable you’ll be as a borrower.

Figuring out how to get a business loan to start a business will be easier if you have a stellar credit score. Banks will offer financing to borrowers with credit scores of 680+. Anything below that and you’ll likely be a better fit for a non-bank lender.

Before you get too far into your search for getting a startup business loan, make sure you know where your credit score stands. If it isn’t where you want it to be, you can take steps to improve it!

Getting your credit score in great standing will help you secure the financing you need to start your business.

Consider Your Time in Business

Your time in business matters a lot for the business financing options you can qualify for. In the eyes of a small business lender, the more time you have in business the better. Showing that you have a few years under your belt proves that you can withstand the regular ups and downs that come with running a business. You’ve established your presence.

Now, you’re looking for a loan to start a business, so you likely don’t have that much time in business. However, having just one month in business versus six months in business does make a difference. You’ll have more options available to you if you have six months or even a year in business, so consider waiting it out until you meet that benchmark before applying to a startup loan.

Review Your Annual Revenue

Now, you might not even have a year in business—making annual revenue a little hard to look at.

If that’s the case, check out your monthly revenue.

Many online lenders require a minimum annual or monthly revenue to qualify for any type of loan. They want to make sure you’re bringing enough money in on a regular basis to cover your loan payments.

Just be aware that, when it comes to startup loans, you might have limited options at first because you haven’t really started making any money yet. If this is the case, try to your best to bring in steady revenues month after month. That way when you apply for a loan to grow your startup business, you have consistent monthly revenues to show the lender.

Review Your Cash Flow

While lenders might not necessarily look at your cash flow, you should be looking at it—especially when you’re trying to learn how get a business loan to start a business.

Cash flow measures the cash coming in and out of your business. As a startup, you might find that more cash flows out than into the business. That’s a common problem many newer businesses face.

It’s important to look into the strength of your cash flow before you take out financing to grow your startup. Many startups only qualify for daily or weekly payment loans, which can put a real dent in cash flow. If you have strong cash coming in each week, then you may be fine covering frequent payments. But you don’t want to end up in a situation where you can’t cover your loan payments because your cash flow is weak.


4. Choose the Right Startup Loan

Now that you know how to get a loan to start your own business, you’re ready to start your startup loan search.

We’ll break down the ins-and-outs of each small business startup loan option out there, so you can make the most informed business financing decision. Here are your startup loan options:

Loan amountLoan repayment termInterest rateAnnual revenueCredit scoreBest for
Equipment financingUp to 100% of equipment valueExpected life of equipment8% – 30%Over $130,000630Purchasing equipment to start a business
Business line of credit$10,000 – $1 million6 months – 5 years 7% – 25%$50,000630Paying for a wide variety of business startup costs
Business credit card Varies by on creditworthiness Monthly Varies by card issuerVaries by card issuerVaries by card issuerPaying for a wide variety of low-cost startup expenses
Credit line builder N/AMonthlyN/AN/A700+Paying for a wide-variety of high-cost startup expenses while building business credit

Equipment Financing

If you’re starting your business from scratch, you’ll probably need to purchase some equipment to get your company up and running. You might need to buy cash registers, computers, delivery vehicles, or machinery. Unfortunately, the equipment you need to start your business can be pricey—and you might not be able to pay for it out-of-pocket.

Luckily, you can use equipment financing as a startup loan to help you pay for these costs. With equipment loans, you can finance up to 100% of the cost of the equipment you need.

With equipment financing, the piece of equipment you’re purchasing acts as collateral for the loan. The amount you get for the loan depends on the value of the equipment—which is a good thing if you’re just starting up and you don’t have a strong track record for your business yet. Because the equipment acts as collateral, lenders are able and willing to take a little more risk and offer a lower interest rate than they would with other types of loans.

Business Lines of Credit

If you’re looking for an all-purpose startup loan that can finance your business’s ongoing operations, you might want to consider a business line of credit.

When you open a business line of credit, you can use the funds for a number of things, whenever they arise:

  • Supplement gaps in cash flow
  • Get more working capital
  • Buy more inventory
  • Pay off more expensive debt
  • Payroll for temporary employees
  • Backup coverage of unexpected costs

When you’re approved for a business line of credit, you’re given a pool of funds that you can tap into whenever you want or need. Once you pay back what you’ve taken out, plus interest, your line of credit gets refilled to its original amount.

Business Credit Cards

These days, plenty of business owners turn to business credit cards when looking to finance their startup. Using a business credit card as a small business loan gives your startup access to a revolving line of credit. This means that you always have the capital on hand to use for purchases or cash withdrawals, without hassle or delay.

What’s more, business credit cards are also easier to acquire than loans, don’t require any collateral, and can be used for a wide variety of expenses. Some business credit cards will offer you a 0% introductory APR, which means you won’t initially pay any interest on the funds you use. Just make sure that you can pay the balance before the rate increases.

Check out Fundera’s guide to the best startup business credit cards.

Credit Line Builder

As you’re searching for tips on how to get a business loan to start a business, you might stumble across the credit line builder.

With a credit line builder, you work with a financing company to apply for multiple business credit card applications at once—saving you time and effort.

You’re then approved for a credit amount that will equal the combined maximum amount of all the credit cards you qualified for. Now, you have access to that set of credit cards, and you can use them to make purchases—and quickly build business credit.

You’ll need to be careful that you don’t spend too much with any of the business credit cards available to you. Late payments and high utilization across multiple business credit cards can really hurt your credit score. One late payment might not lower your credit score too much, but if you get behind a few months in a row, your credit score will take a serious hit.


Tips for How to Get a Loan to Start a Business

Let’s review what we’ve covered so far. You know why you need to take out a startup loan and what small business startup loans are out there. What about best practices for how to get a loan to start a business?

Well, there are steps you can take to make your startup fundable, and convince lenders that financing your growth is a smart move.

Boost Your Credit Rating

Credit scores are the first things lenders look at when deciding whether to fund your small business. Some startup founders are seasoned entrepreneurs with high business credit scores, but some startup owners are new to the game. If this is the first business you’ve started, you probably don’t have an established business credit history. If this is the case, your personal credit score will be used to gauge your credibility as a borrower. If your credit score isn’t where it needs to be, you can take steps to improve it.

Build Your Assets

To secure a startup loan without a lot of proven business history, lenders will require that the startup owners have some sort of collateral. As a startup, you probably don’t have a lot of business assets, like real estate, equipment, or inventory. Instead, lenders might ask startup founders to provide personal assets, like a home or a car.

Of course, putting your personal assets on the line can be very risky. If you can’t pay back your loan, you won’t only lose your business—you might end up losing your home, car or other property.

Don’t want to put up your personal assets, but don’t know how to get a loan to start a business otherwise? Well, you can do try two things:

Approach Investors

If you have an established relationship with an investor, you can ask them for the funds you need to buy assets for your business. Then, you can use these assets to secure a loan with a commercial bank or other lender.

Try the SBA

You might want to consider an SBA loan. The SBA offers a CDC/504 Loan Program, designed to help companies purchase real estate and equipment—which can serve as collateral for a loan you need in the future.

Build Your Customer Base

Lenders will be more comfortable funding a startup if they have a proven, reliable and large customer base—and a strong cash flow from it.

If you want to get more customers, you might need to up your marketing efforts, update your website, or publish more content related to your brand.

Keep Updating Your Financial Projections

If you’re tackling how to get a loan to start a business, you know that you need a viable business plan in place. When you approach lenders, you’ll want to make sure that you’ve updated the financial projections in that plan, and that your projections are still realistic.

To make sure you’re not giving your lenders guesses, always keep up to date with where your business’s finances are going.


Get Funded Today

As you can see, there are many different approaches you can take to acquire funding for starting your business. What you need to do is determine which option makes sense for you considering your personal and business financial background.

Good luck!

 

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